Sole director and shareholder companies have been possible, and common, since the mid 90’s. This may well be the best structure for many small businesses, but what happens when the sole director becomes bankrupt?
Section 206B of the Corporations Act provides that on becoming a bankrupt a person is automatically disqualified from “managing a corporation”. The language of section 201F (3) strongly suggests that “disqualified” means automatically removal from the position of director. That is, there appears to be no need for the bankrupt to take any overt action to resign as director.
Also, although the bankrupt’s shareholding in the company vests in the trustee of the bankrupt estate the trustee does not become a shareholder in the company until the director causes the share register to be updated. The result is a company without a director and no registered shareholder who can rectify the position. It is a rudderless ship.
Often the bankrupts company will be liquidated or struck off by ASIC; however occasionally there may be a financial advantage in keeping the company alive. Fortunately, the clever drafters of the Corporations Act have written a machinery section that overcomes the no director or registered shareholder impasse.
Section 201F (3) explicitly states that a trustee of the bankrupt estate may, where the bankrupt was the sole director and shareholder, appoint a person as the director of the company. Further, subsection (4) allows the trustee to appoint themselves.
Whether the trustee should take up the appointment would depend on the circumstances, and many trustees would hesitate to take on that role if any risk were perceived.